Comcast Corp. gave Wall Street analysts another detailed look at its overall strategy, focusing on the opportunity it sees in the more than 18 million homes within its footprint that don’t subscribe to cable services.
It was a marked change from the last “Analyst Day” the No. 1 MSO held, on May 16, 2003 in New York, when Comcast executives touted the successful and rapid integration of AT&T Broadband.
The 2003 session had a greater impact on the stock — Comcast shares closed at $30.07 on May 16, up 85 cents — than this year’s session. Comcast’s share price dipped 23 cents after the most recent (May 10) meeting, closing at $31.51.
Still, the news remained upbeat. Comcast spotlighted about a dozen executives at the five-hour gathering at the Wachovia Center in Philadelphia, each with good news about the opportunities ahead.
IT’S THE BUNDLE
If there was a central theme to the May 10 Analyst Day, it was the bundle, and more specifically how the bundle of digital telephone and high-speed Internet service will attract those customers that have shunned Comcast in the past.
Comcast has said before that it plans to roll out a phone/data package priced at $69 per month later this year.
In the past, the concept of bundling was near sacrilege around Comcast’s Philadelphia headquarters, president and chief operating officer Steve Burke said at the meeting. But that attitude has changed dramatically, especially since MSOs that have created voice and data packages — most notably Cablevision Systems Corp. — have seen that bundles drove penetration into other services.
“We’ve been very hesitant to talk about bundling or pursue bundling as a strategy because all too often we felt bundling was a code word for discounting,” Burke said at the meeting. “The idea of taking two or three disparate products throwing them together and overly discounting to us didn’t seem like it made sense. We are very interested in bundling when it means taking the very products themselves and blending the functionality of the products together and offering them at a combined price.”
Burke said what made the three-product bundle possible was the massive upgrade of the AT&T Broadband systems, which Comcast acquired in 2002. As that upgrade winds down, Comcast is poised to take advantage of other opportunities to grow penetrations in digital video recorders, digital cable and telephony.
Burke said that currently Time Warner Cable has 20% penetration of DVRs, Comcast has about 5%; Cablevision has 55% digital penetration, Comcast has 40%; and Cox Communications Inc. has 25% high-speed Internet penetration while Comcast is at 18%.
Just bumping up DVR penetration to Time Warner levels would add another $360 million in cash flow annually, Burke said.
“The real untapped advantage — and this derives from the relatively low video penetration — is the fact that we have 40 million homes and what is that going to mean in terms of our overall ability to market new services to those 40 million homes like telephone and launch commercial services to the footprint that that represents,” Burke said.
Burke’s enthusiasm was shared by most of the analyst community.
“In large part, we not only agree with Comcast’s optimistic outlook, we agree with many of the strategic steps the company is taking,” Citigroup Smith Barney cable and satellite analyst Jason Bazinet wrote in a research report.
NEW ENGLAND CLOSEUP
The potential of cable telephony could have a big impact in New England, Comcast’s largest operating region with 3.2 million customers, including Boston.
The New England market has had circuit switched telephony for about six years — when it was controlled by MediaOne Group Inc. New England region senior vice president Kevin Casey said during his presentation that circuit-switched telephony is available in about 50% of the footprint and accounts for about 7% of system revenue.
While Comcast has purposely held back on marketing circuit switched service until its IP phone service becomes more widely available, the MSO has already launched voice-over-Internet protocol service in Springfield, Mass., and Hartford, Conn. Boston is slated to receive IP phone later in the year.
Casey said that the New England market has a long history of product innovation — it launched nine new products or enhancements to existing products last year alone. And that has translated into significant financial results for the division.
Casey said that video revenue growth was about 12% last year and system operating cash flow rose 19% in 2004. Free cash flow (cash flow once interest payments and capital expenditures are made) for the region was up five-fold between 2002 (the year of the AT&T Broadband merger) and 2004.
In a research report, Merrill Lynch & Co. media analyst Jessica Reif Cohen was impressed by the New England results.
“Results in New England demonstrate the market share potential Comcast has been able to achieve in a relatively competitive landscape,” Reif Cohen wrote in her report.
While Comcast is focusing on driving penetration to its existing footprint, executive vice president and co-chief financial officer Larry Smith said in his presentation that plans to unwind several partnerships could bring even more customers under Comcast’s control.
Comcast already stands to gain about 1.06 million subscribers through its participation in the $17.6 billion purchase of Adelphia Communications Corp. with Time Warner Inc., but Smith said the MSO is not done dealing.
The Adelphia transaction is expected to close in the next nine to 12 months. Practically on the heels of that closing will come the resolution of Comcast’s 50-50 partnership with Insight Communications Co., Smith said, adding that Comcast could pick up about 650,000 Insight subscribers, or half of Insight’s 1.3 million Midwest customer base.
Comcast inherited the Insight partnership interest in November 2002 after its acquisition of AT&T Broadband. According to the agreement, either party had the right to dissolve the partnership after Dec, 31, 2005, or leave it intact.
Insight is in the process of taking itself private in a $650 million deal with private equity firm The Carlyle Group. The dissolution of the Comcast partnership is not expected to affect that plan, because Comcast owns a 50% interest in the underlying partnership, not in the publicly traded company, Smith said.
Smith said that Comcast has made its intentions known to Insight. “That is on track to be broken up at the end of this year,” he said. “We can pull the trigger on Dec. 31, 2005. We’ve made it clear, as of now, certainly that is our intent. We’ll end up getting half of those [1.3 million] subscribers.”
Insight CEO Michael Willner declined to comment. A source familiar with both companies said any attempt to dissolve the partnership would only begin on Dec. 31 and could take months to resolve. That same source said that while breaking up the partnership is what Comcast would do now, that could change by the end of the year.
Smith also shed some light on Comcast’s plans for its other cable partnerships. He said that Comcast interests in Kansas City Cable Partners and Texas Cable Partners with Time Warner Cable will be broken up by mid to late next year, with Comcast likely taking subscribers in Southwest Texas and Kansas City.